Hanwha wins fight for Daewoo Shipbuilding

Hanwha is to buy KDB's controlling stake in Daewoo Shipbuilding, but doubts remain about its financing ability as Bank of Korea slashes interest rates in a battle to stave off crisis.
Hanwha Group won the bid for Korea Development BankÆs (KDB) controlling stake in Daewoo Shipbuilding & Marine Engineering (DSME) on Friday, while the fight to support Korea's vulnerable economy continues. Yesterday, the Bank of Korea announced new measures to restore confidence including an aggressive interest rate cut.

State-owned KDB chose Hanwha over rival bidder Hyundai Heavy Industries in the contest for a 50.4% holding in the worldÆs third-largest shipbuilder, apparently because it believes Hanwha should be able to raise the necessary funding. The final price hasn't been disclosed, but according to analysts, Hanwha will pay W6.5 trillion ($4.9 billion) for the stake.

Hanwha, a conglomerate (or chaebol) rooted in explosives maker Hanwha Corp with interests that include chemicals, finance and travel, is expected to sign a memorandum of understanding with KDB within the next few days. It will pay 5% of the bid price at signing and then conduct due diligence on DSME in November. In the following month it will make a second payment of 10%, by which time the price may have been revised. The remaining money will be paid after the final contract is signed, also in December.

Yet, analysts doubt both the financial logic and timing of the deal. A W6.5 trillion price-tag values the company at a multiple of about 20 times price-to-book û compared with current valuations in the sector of around 2.5 times book.

One Seoul-based stock analyst says: ôWe, along with others, are highly sceptical of the plan. Funding for the acquisition will be tough, while we also doubt the logic of the deal particularly now when shipbuilding has probably peaked as the global economy slows.ö

The market seemed to support his view. On Friday, shares in Hanwha Corp fell by the 15% daily limit to W17,000 û the lowest for a year.

JD Yang, conglomerates analyst at Samsung Securities, reckons that Hanwha is likely to struggle to raise the necessary financing despite plans to generate cash of up to W8.5 trillion. ôInternal cash reserves of W2 trillion and the W1.5 trillion in proceeds it should receive from its disposal of a 21% stake in Korea Life are fairly assured,ö says Yang. ôHowever, Hanwha is also banking on raising W1.5 trillion from an initial public offering of its Hanwha Engineering & Construction subsidiary at some point, and a further W2 trillion from real estate sales û neither of which are guaranteed in turbulent stock and property markets. An anticipated W2 trillion injection by financial investors, including the National Pension Fund, is also increasingly uncertain.ö

The deal had been delayed several times, and the controlling stake has been up for sale for the past seven months, ôbut Hanwha is keen to bolster its profile among conglomerates, and one way of doing this is to buy a well-known brandö, says another analyst. ôUnfortunately, DSMEÆs dock-yard assets are not the best quality.ö

Enthusiasm for DSME has flagged as its shares have fallen nearly 80% this year because of the financial market turmoil and a slowing industry outlook. Steelmaker Posco was disqualified from bidding by KDB after its consortium partner GS Group pulled out of the bidding process at the last minute. The disqualification came despite Posco wanting to continue on its own.

Despite poor market conditions, the deal caused few surprises, however, The Ministry of Strategy and Finance (MOSF) announced in the second week of August that it would move ahead with its plans to privatise 41 of KoreaÆs 305 state-owned firms through sales or mergers.

The plan, which is meant to produce more efficiency in Korea Inc and thereby help economic growth, includes the sale of a 49% stake in Incheon International Airport and part of Industrial Bank of Korea and its affiliates, as well as the merger of Korea National Housing and Korea Land.

ôForeign countries have strengthened national competitiveness with successful reforms in the public sector. In contrast, our country has not continued to reform the public sector in the past five years, but expanded it,ö MOSF said at the time. It estimated that the government could save about W2 trillion a year by privatising the state-run companies, which employ 260,000 people and have a budget of $327 billion for this year. Some state-run companies ôhave low productivity and excessive wages and employee benefitsö, it added. ôImproving the management of the state-owned companies will ensure better-quality public services.ö

The government also plans to sell stakes in a further 14 companies û including DSME û that are now owned by state-run banks, most notably KDB itself. The future of these 14 companies has been subject to much speculation and sometimes conflicting signals about the governmentÆs intentions about the bankÆs public and private roles. The idea is to set up a holding company for KDB in December and off-load the bank by 2012, offering part of the governmentÆs stake to foreign strategic investors ahead of an initial public offering.

But, the privatisations of Hyundai Engineering & Construction, Hynix Semiconductor and Woori Financial Group are likely to be delayed until better stockmarket conditions, said the MOSF in August. Most of the 14 companies targeted for privatisation were bailed out by the state in the years following the 1998 financial crisis.

New measures to support the economy
Despite the appearance of business as usual, on Monday the Bank of Korea dramatically cut its benchmark seven-day repurchase rate by a record 75 basis points to 4.25% at an emergency board meeting in an attempt to support markets. The central bank also broadened the type of bonds it will accept as collateral in money-market operations, giving lenders access to more funds, and cut rates on special loans for small- and medium-sized companies from 3.25% to 2.5%.

To help businesses that have been caught on the wrong side of forward foreign exchange transactions, the central bank also said it would ease rules to make it easier for exporters to borrow dollars. Small businesses that borrowed mostly in Japanese yen would be able to extend their foreign-currency loans for another year.

The announcements followed an emergency meeting on Sunday between President Lee Myung-bak, finance minister Kang Man-soo and Bank of Korea governor Lee Seong-tae, after Lee returned from the Beijing summit of Asian and European leaders.

President Lee stressed that the country is a long way from experiencing a repeat of the 1998 financial crisis when it needed a $57 billion loan from the IMF.

Even so, the Kospi stock index fell 1.4% yesterday, after collapsing 20% last week in the worst week for the country's stockmarket in more than a decade. The currency also fell, continuing a trend that has seen it drop 36% against the US dollar and 47% against the Japanese yen so far this year.

The problem is that interest rate cuts will probably lead to a further depreciation of the won, when businesses and investors need some currency stability. But preventing recession is the authoritiesÆ priority now. The central bank said that "a large cut was called for in order to guard securely against the possibility of a sharp contraction of real economic activityö and hinted that there might be further rate cuts.

Last week, the government promised $130 billion to support banks struggling to access foreign funds and to inject W2 trillion into the financial system through repurchase agreement operations. It also raised the limit on loans to commercial banks which are allocated to small- and medium-sized businesses from W6.5 trillion to W9 trillion.
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